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Sunday, August 9, 2009

The Dhandho Investor: Chapter 1

Mohnish Pabrai is an Indian-American businessman and investor. For a number of years, he turned heads with the performance of Pabrai Investment Funds since its inception in 1999. Pabrai has high regards for Warren Buffett and admits that his investment style is copied from Buffett and others. Over the next few weeks, we'll be exploring the topics in his book about value investing.

Pabrai starts the book by discussing the term "dhandho" (pronounced "dhun-doe"), which is a Gujerati word meaning "endevours that create wealth" or "business". Gujerat is a coastal province in India that has served as a hotbed for trade with Asia and Africa. The Patels are a subsection of Gujeratis that are particularly entrepreunerial (they were chosen by the rulers to run the operations of the farm and collect the taxes), and their entrepreneurial ventures led to them forming a dominant part of the East African economy by the early 1970s. When Asians were thrown out of Uganda in 1972 on the basis of their race, a flurry of Patel immigrants landed in Canada, England and the United States.

The Patels now make up about 0.2% of the American population. Yet they own over half of the motels in the entire country, which comprises $40 billion in assets and $725 million in annual taxes. Pabrai attributes this to particular conditions which led the Patels to recognize and benefit from the minimal downside risk and upside potential that existed in the motel business when they immigrated to the United States.

The first Patels arrived during a recession. Motel owners were being foreclosed due to low occupancy rates. With just a few thousand dollars in hand, Patels could kill two birds with one stone by finding room and board for their families and a job at the same time by buying a motel. Since the assets are hard, banks would finance 80-90% of the purchase, so the initial investment required was low.

From here, Pabrai discusses some of the financial details that made these investments value investments: low risk (the few thousand dollars initial investment) and high reward (with their low living expenses and hard-working attitude, Patels could make back their initial downpayment in the first four months!). This introduction to low risk / high reward sets the theme for the rest of the book.